Saturday, November 28, 2009

Economics article on FITs

[Update: the full article is available as a PDF from one of the author's website.]

Calling all FIT advocates -- two economists from the German Institute of Economic Research (DIW) have published an article in a recent issue of the Energy Journal. Unfortunately, the abstract is only available as a pop up, so I have included the entire abstract here:

Most models that are used to analyze support policies for renewable electricity neglect important market features like oligopolistic behavior, emission trading, and restricted cross-border transmission capacities. We use a quantitative electricity market model that accounts for these aspects and decompose [too bad professional journals do not have editors anymore -- "break down" would certainly have been better than "decompose" here] the impact of the German Feed-in tariff (FIT) into two frequently counteracting effects: a substitution effect and a permit price effect. We find that the total effect of the policy increases the German consumer price slightly by three percent, while the producer price decreases by eight percent. In addition, emissions from electricity generation in Germany are reduced by eleven percent but are hardly altered on the European scale. Finally, it turns out that price-cost margins of almost all firms are increased by the FIT, while nonetheless, the profits of firms are significantly lowered unless the firms combine relatively carbon-intensive production with a weak connection to the German grid.

This article should be useful to us because the DIW's economic research is generally quite sound. (You may remember that they came out against the RWI report which found that support for solar was counterproductive.)

Interestingly, Der Spiegel (Germany's main news weekly, though it simply cannot get energy issues right -- I thrash their coverage of wind power across three pages in my book) has apparently interpreted this article in a way that the authors did not intend, and they have responded. Solarpraxis writes that the authors apparently (I have not paid the 20 dollars to read the original article) say that support for renewable energy should be designed to work well with whatever emissions trading policies are simultaneously implemented. But Der Spiegel seems to have understood that to mean that German renewables policy does not work.

The authors respond in a press release: "This conclusion is nonsensical, misleading, journalistically unprofessional. The journalists fail to understand that both instruments -- support for renewables and emissions trading -- have to be seen in relation to each other, which is exactly what we do... Feed-in tariffs have therefore justifiably been copied by a large number of other countries."